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Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS Irwin/McGraw-Hill C H A P T E R F I F T E E N.

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Presentation on theme: "Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS Irwin/McGraw-Hill C H A P T E R F I F T E E N."— Presentation transcript:

1 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS Irwin/McGraw-Hill C H A P T E R F I F T E E N PRICE: ARRIVING AT THE FINAL PRICE

2 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: Understand how to establish the initial approximate price level using demand- oriented, cost-oriented, profit-oriented, and competition-oriented approaches. Identify the major factors considered in deriving a final list or quoted price from the approximate price level.

3 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: Describe adjustments made to the approximate price level based on geography, discounts and allowances. Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price. Describe the principal laws and regulations affecting pricing practices.

4 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-1 Steps in Setting Price Identify pricing constraints and objectives Estimate demand and revenue Estimate cost, volume, and profit relationships Set list or quoted price -One price or flexible prices -Company, customer, and competitive effects -Incremental costs and revenues Make special adjustments to list or quoted price -Discounts -Allowances -Geographical adjustments Select an approximate price level -Demand- oriented approaches -Cost-Oriented approaches -Profit-oriented approaches -Competition- oriented approaches

5 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-AA The Gillette Mach 3 Shaving System Gillettes world leading market share: 71% in North American and Europe 91% in Latin American 69% in India New Mach 3 shaving system is priced 35% above their highly successful Sensor Excel model, as marketing research indicated that men would be willing to pay 45% more than they were paying for Sensor given the additional benefits of the Mach 3.

6 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–2 Four approaches for selecting an approximate price level PP15–2 Four approaches for selecting an approximate price level © 1994, Richard D. Irwin, Inc. To accompany MARKETING, 4/E by Berkowitz, Kerin, Hartley, and Rudelius. Selecting an approximate price level Demand-based approaches skimming penetration prestige price lining odd-even target bundle yield management Cost-based approaches standard markup cost-plus experience curve Profit-based approaches target profit target return on sales target return on investment Competition-based approaches customary above, at, or below market loss leader

7 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-BB Demand-Oriented Pricing Approaches Demand-Oriented Approaches include: skimming pricing penetration pricing prestige pricing price lining odd-even pricing target pricing bundle pricing yield management pricing

8 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–3 Demand curves for two types of demand-based methods A B C PQPQ Quantity Price P1P1 Quantity Price A B P2P2 P3P3 Prestige pricing Price lining

9 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-CC Concept Check 1.What are the circumstances in pricing a new product that might support skimming or penetration pricing? 2.What is odd-even pricing?

10 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-DD Cost-Oriented Pricing Approaches Cost-Oriented Approaches include: standard markup pricing cost-plus pricing experience curve pricing

11 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–A Mark-ups for a manufacturer, wholesaler and retailer on a home appliance sold to the consumer for $100 $100 80 60 40 20 10 0 Price ManufacturerWholesalerRetailer Manufacturer selling price = $ 59.93 Manufacturer mark-up = $ 7.76 = 15% Manufacturer cost = $ 51.77 Wholesaler mark-up = $ 11.90 = 20% Wholesaler selling price = $ 71.43 Retailer cost = $ 71.43 Retailer mark-up =$ 28.57 = 40% Retailer selling price = $ 100 Wholesaler cost = $ 59.53

12 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–B Cellular phone unit sales, average cost and average price: evidence of the experience effect 3,500 83848586878889909192939495 3,000 2,500 2,000 1,500 1,000 500 0 Average Price of Least-Expensive Models Dollars 838485868788899091929394 95 2,500 2,000 1,500 1,000 500 0 Average cost of Least-Expensive Models Dollars 83848586878889909192939495 3,000 2,500 2,000 1,500 1,000 500 0 Cellular Phone in Service Dollars As Cellular Phone Volume Increases... The Average Cost to Produce Decreases... Followed by Price Decreases

13 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-EE Profit-Oriented Pricing Approaches Profit-Oriented Approaches include: target profit pricing target return-on-sales pricing target return-on-investment pricing

14 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-4 Results of computer spreadsheet simulation to select price to achieve a target return on investment Assumptions SIMULATION or Results Financial Element Year A B C D Assumptions Price per unit (P) $50 $54 $54 $58 $58 Units Sold (Q) 1.000 1,200 1,100 1,100 1,000 Change in Unit Variable Cost (UVC) 0% +10% +10% +20% +20% Unit variable cost $22.00 $24.20 $24.20 $26.40 $26.40 Total expenses $8,000 Same Same Same Same Owners salary $18,000 Same Same Same Same Investment $20,000 Same Same Same Same State and federal taxes 50% Same Same Same Same Spreadsheet Net Sales (P x Q) $50,000 $ 64,800 $59,400 $63,800 $58,000 simulation Less: COGS 22,000 29,040 26,620 29,040 26,400 results (Q x UVC) Gross Margin $28,000 $ 35,760 32,780 $ 34,760 $31,600 Less: total expenses 8,000 8,000 8,000 8,000 8,000 Less: owners salary 18,000 18,000 18,000 18,000 18,000 Net profit before taxes $ 2,000 $ 9,760 $6,780 $8,760 $5,600 Less: taxes 1,000 4,880 3,390 4,380 2,800 Net profit after taxes $ 1,000 $ 4,880 3,390 4,380 2,800 Investment $20,000 $20,000 $ 20,000 $20,000 $20,000 Return on Investment 5% 24.4% 17.0% 21.9% 14.0%

15 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-FF Competition-Oriented Pricing Approaches Competition-Oriented Approaches include: customary pricing above-, at-, or below- market pricing loss leader pricing

16 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-GG Concept Check 1.What is standard markup pricing? 2.What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firms resources used in obtaining the profit? 3.What is the purpose of loss-leader pricing when used by a retail firm?

17 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-HH One-Price versus Flexible-price Policies One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. An example would be Saturns no hassle-one price policy for new and used cars. Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. Car dealers have traditionally (and still do) used flexible pricing in getting to the final sale price.

18 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-5 The Power of Marginal Analysis in real-world decisions Suppose the owner of a picture framing store is considering buying a series of magazine ads to reach her up-scale market. The cost of the ads is $1,000, the average price of a framed picture is $50, and the unit variable cost(materials plus labor) is $30. This is a direct application of marginal analysis that an astute manager uses to estimate the incremental revenue or incremental number of units that must be obtained to at least cover the incremental cost. In this example, the number of extra picture frames that must be sold is obtained as follows: Incremental number of frames = = Extra fixed cost Price - Unit variable cost $1,000 of advertising $50 - $30 50 frames =

19 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-6 Three special adjustments to list or quoted price Discounts Quantity cumulative non-cumulative Trade (functional) Cash Allowances Trade-in Promotional Geographical adjustments FOB origin pricing Delivered pricing Single zone pricing Multiple zone pricing FOB with freight- allowed pricing Basing-point pricing Special adjustments to list or quoted price

20 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS Jobber discount: 5% of jobber sales price Jobber cost or manufacturers sale price $ 59.15 Jobber cost or manufacturers sale price $ 59.15 Wholesaler cost or jobber sales price $ 63.00 Wholesaler cost or jobber sales price $ 63.00 Retailers cost or wholesaler sales price $ 70.00 Retailers cost or wholesaler sales price $ 70.00 PP15–7 The Structure of Trade Discounts Manufacturers suggested list Price $100.00 Manufacturers suggested list Price $100.00 (minus) ($ 30.00) (minus) ($ 7.00) (minus) ($ 3.15) Retail discount: 30% of manufacturers suggested price Wholesalers discount: 10% of wholesalers sales price

21 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–C Example of basing-point pricing $10 freight $30 freight $20 freight Seattle customer pays $130 Los Angeles customer pays $120 St. Louis plant is basing-point $100 base price Chicago customer pays $110

22 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15–8 Pricing practices affected by legal restrictions Consumer Goods Pricing Act Sherman Act Federal Trade Commission Act Robinson-Patman Act Robinson-Patman Act Horizontal price fixing Predatory pricing Predatory pricing Geographical pricing Geographical pricing Price discrimination Price discrimination Vertical price fixing Vertical price fixing Deceptive pricing Deceptive pricing

23 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 MARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS PP15-II Concept Check 1.Why would a seller choose a flexible-price policy over a one-price policy? 2.If a firm wished to encourage repeat purchases by a buyer throughout the year, would a cumulative or non-cumulative quantity discount be a better strategy. 3.What pricing practices are covered by Sherman Act?


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